Friday, August 15, 2014

The details of the [2014 Social Security Trustees] report clearly show that the crisis in Social Security is not only deepening but widening as well.

The reasonable solvency of the system was reduced over the course of 2013 from 19 years to 18 years. This reduction means that for the first time in history on average someone retiring today at normal retirement age expects to outlive full benefits. Anyone who is 48 years old or younger roughly expects to retire after the system pays depleted benefits. This, believe it or not, is the good news.

The bad news is that the size of the crisis arriving in 2033 is growing rapidly. The report reveals that the unfunded liabilities now exceed the Gross Domestic Product of the entire county. The financing shortfall grew by $1.8 trillion. The growth means that Social Security created more than $2 of broken promises for every dollar that it collected ($855 Billion in 2013). The grand total of unfunded liabilities exceeds all revenue ever collected by the system since its inception.

Arne, That's not too different from a debt-to-GDP ratio. You alternately could compare accrued benefits to the TF ratio (which is how a private or state/local pension would do it); you'd get more or less the same result.

Thanks for your thoughts. I am not sure how the comparison mixes numbers from the far-future with annual numbers. So I hope you will explain your thoughts.

It is my understanding that the infinite shortfall is expressed in present value. It is how much capital is required today in order to put into the Trust Fund operating forever.

GDP is simply a yardstick of production that people can see relative size. At some level production is what pays for Social Security.

I do not use %s of GDP, payrolls, and the like because that structure tends to put readers in my audience to sleep. My audience is not trained economists. I hope that you will explain a better yardstick.

"It is hard to take seriously someone who mixes infinite horizon numbers with annual numbers like this. "

What is an infinite horizon value? Is it any different than looking at the next week, month, year, decade, century or more? Or can it be simplified? The math is not difficult. For most people planning next weeks meals or buying groceries is not a difficult decision. Is social security any different?

What we know is that social security benefits are based on wages earned subjected to SS-OASI. Pretty simple. It is not based on taxes paid. We also know that SS-OASI revenues are based on wages subjected to SS-OASI. Clearly the costs and revenues are directly related. The variable is the tax rate, interest rate and inflation.

Using GDP is a waste of time. neither OASI benefits nor revenues are based or dependent on GDP. Wages may make up a portion of GDP, but this ratio is not constant, so why use it.

Life span past age 67 changes very slowly and the rate of change has been slowing, not increasing for fifty years. If the rate of change had been increasing, then it would be a little bit more challenging projecting costs.

To calculate the present value unfunded liability is actually very simple and does not require more than 100 years forward looking. In fact a very good value can be computed by simply looking no more than 75 years.

However, within this 85 years one must look at only those who will receive benefits during their working life. The calculation should not include tax revenues paid by any worker who will not receive a life time of benefits. This means the age range we are looking at is everyone now living who is age 20 and over. When the person who is now age 20 turns 100 in 80 years the potential that there are many alive is minimal. It also means that in 47 years the calculation should assume no additional OASI tax revenues. It means paying benefits for 80 more years, but only having 47 years of OASI tax revenues.

since benefits are based on wages and revenues are based off product of wages and tax rate we have are cost and revenue side constrained. Assuming a wage growth increases both revenues and the future initial benefits, no guessing at all. The only challenge is to figure out what inflation will be. Do you use historical rates, 20 - 30 or 40 year moving averages? The same could be used for US Treasury Rates. I would not use the rates from not 1980, nor would I use the rates today.

What you will get is a very large unfunded liability. For those who do not like this approach or for those who say this is not an infinite horizon I would ask, what is? If we were to start Social Security today, would we start paying meaningful benefits now without the beneficiary paying meaning furl taxes? This is what got us into the mess we face today.

To me the way to quantify it in one person's life time. Each person should be responsible for their costs and not pass them on to the next generation. By cutting off the time frame at age 20 and below we allow them to actually create fully funded program without the burden of today's.

When one takes out a mortgage, what happens to the payment as one changes the term from 10, 15, 20, 30 years? The payment generally drops with longer terms while the amount of interest increases. What happens if the term were to go to 100 years? Does the payment drop much or have we reached a point of diminishing returns?

It is a simple calculation most can do. If you choose to do it, I think you will agree that extending the term only means that you pay pretty much forever. It is better to bite the bullet and reduce the term. This is why an infinite time horizon for Social Security is a flaw. The cost never gets paid off, but is forever paid by every following generation.

Brenton, you did a great job, well articulated; one of the best writings on social security I have read!!!

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.